Central Bank holds surprise meeting in March and accelerates tightening pace

On 6 March, the Central Bank of Egypt (CBE) held a special monetary policy committee meeting, originally scheduled for 28 March. The CBE sharply accelerated the pace of its tightening cycle, hiking rates by a whopping 600 basis points—the biggest increase on record—bringing the overnight deposit, overnight lending and main operations rates to 27.25%, 28.25% and 27.75%, respectively. The increase came on the heels of February’s 200 basis point increase and brought the cumulative rate rise since March 2022 to 1,900 basis points. Moreover, the CBE let the Egyptian pound depreciate significantly against the USD.

Headline inflation climbed to record highs and inflation expectations remain markedly above the CBE’s 5.0–9.0% target band beyond Q4 2024 due to foreign exchange shortages and external spillovers. Against this backdrop, the CBE decided to hike and reaffirmed its commitment to price stability; the Bank said it was aiming to bring the real interest rate into positive territory in order to speed up the disinflation process and anchor inflation expectations. The CBE also noted that closing the gap between the official and the parallel market exchange rates was necessary and thus it would “allow the exchange rate to be determined by market forces”.

In its communiqué, the Central Bank did not provide explicit forward guidance. That said, it noted that risks to the inflationary outlook remained skewed to the upside and that the policy rate would, therefore, remain in contractionary territory “for as long as necessary to achieve the desired disinflation course.” The Bank canceled its 28 March meeting and is scheduled to convene next on 23 May.

Regarding future policy moves, analysts at the EIU commented: “We believe that the extraordinarily tight stance will be held steady for the remainder of the year. Another temporary increase is possible as inflation continues to rise in early 2024, but this would be reversed in the second half. Sustained rate cuts will then begin in 2025 as disinflation sets in.”

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